In a market for Bajra, the demand curve for bajra is as follows

q_D = 90 – p for 0 ≤p ≤ 90

= 0 for p > 90

Assuming that the market consists of identical firms, the supply curve of a single firm is

q_s^f = 15 + p for p ≥ 20

= 0 for 0 ≤ p < 20

If free entry and exit of firms is there, the equilibrium number of firms will be?

2

The correct answer is Option 2: 2

The free entry and exit of firms would mean that the firms will never produce below minimum average cost because otherwise they will incur loss from production in which case they will exit the market.

With free entry and exit, the market will be in equilibrium at a price which equals the minimum average cost of the firms. Therefore, the equilibrium price is Rs. 20.

Putting price equal to 20 in demand equation, we will get equilibrium quantity.

i.e. 90 – p = 90 – 20

                = 70.

Thus, Equilibrium quantity is 70.

Quantity supplied by single firm can be found out by putting p = 20 in supply equation of single firm, which is,

15 + p = 15 + 20

           = 35.

Thus, equilibrium number of firms will be 70/35 = 2.